9 MUly 7 461 A (rlend who runs a medium-siced investment trust receatly wrote: "The mercurial temperament, characteristic of the american people, produced 4 major transformation in 1958 and ‘exuberant! would be the proper word for the stock market, at least", i THE GENERAL STOCK MARKET IN 1958 1 think this summarizes the change in paychology dominating the stock market in 1958 at both the amateur and professional level, During the Past year, almost any reason bas been selzed upon to Justify “investing” inthe market, There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of thelr stay will be Hmited to bow long they think profits can be made quickly and effortlessly, While it 1s impovelble to.delermine bow long they will Continue to add numbers to thelr ranks and thereby stimulate rising prices 1 believe it ts valld to say that the longer thelr vielt, the greater the re- action from it, I make no attempt to forecast the general market - my offorte are de- voted to finding undervalued securities, However, 1 do belleve that wide- spread public belief in the Anevitabillty of profits {rom laveatment in stocks will lead to eventual trouble, Should this occur, prices, but not Intrinsic values in my opinion, of even uodervalued securities can be expected to be substantially affected, RESULTS IN 1958 In my letter of last year, I wrote: "Our performance, relatively, is likely to be better in a bear market than Ina bull market #0 that de- ductions made {rom the above results should be tem- pered by the {act that It was the type of year when we should have done relatively well. Ina year when the general market bad a substantial advance, I would be well #aUisfied tomatch the advance of the averages", ahe latter sentence describes the type of year we had in 1958 and my forecast worked out. The Dow-Jones industrial average advanced from 435 to 583 which, after adding back dividends of about 20 points, gave an overall gain of 38.5% {rom the Dow-Jones unit. The {ive partnerships tha operated throughout the entire year obtained reaulte averagingslightly better than thie 38.5%, Based on market values at the end of both years, their gaine ranged {rom 36.7% to 46.2%. Considering the fact that a substantial portion of asects has been and atill le invested in securities, which benefit very little from a faaterising market, I believe these reaulte are reasonably good. 1 will continue to forecast that our results will be above average in a declining or level market, but it will be all we can do to keep pace with a rising market. A TYPICAL SITUATION So that you may better understand our method of operation, I think it would be well to review a epecific activity of 1958. Last year I referred to our largest holding which comprised 10% to 20% of the assets of the various partnerships, I pointed out that it was to our interest to have this stock decline or remain relatively steady, #0 that we could acquire an even larger position and that for thie reason such a security would probably hold back our comparative performance in a bull market. This stock was the Commonwealth Trust Co, of Union City, New Jersey. At the time we started to purchase the stock, it had an intrinsic value of $125 per share computed on a conservative basis, However, for good Teasone, tt paid no cash dividend al all despite earnings of about $10 per share, which wae largely responsible for a depressed price of about $50 per share. So here we had a very well managed bank with substantial ng power selling ata large discount from intrinsic value. Manager wae (riendly to us as new stockholders and risk of any ultimate loon see: minimal, Commonwealth was 25 1/2% owned by a larger bank (Commonwealth had assets of about $50 Million ~ - about half the size of the First National or U.S, National in Omaha),which had desired a merger for many years, Such a merger wae prevented for personal reasons, but there was evidence that this situation would not continue indefinitely. Thus we had a combination of:(1) Very strong defensive characteristic (2) Good solid value building up at a satisfactory pace and;(3) Evidence to the effect that eventually this value would be unlocked although it might be one year or ten yeare. Lf the latter were true, the value would presumably have been built up toa considerably larger figure, #ay. $250 per share. Over a period of 2 year or #0, we were successful in obtaining about 12% of the bank ata price averaging about $51 per share, Obviously it wae definitely to our advantage to have the stock remain dormant in price, Our block of stock increased in value aa its size grew, particu) ly after we became the second largest stockholder with aufficient votin power to warrant consultation on any merger proposal.Commonweslth only had about 300 stockholders and probably averaged tuo trades oF #0 per month, #0 you can understand why I say that the aetivity of the atock market generally bas very little effect on the price movements of some of our holdings. Unfortunately we did run into some competition on buying, which raised the price to about §65 where we were neither buyers nor sellers, Very imal buying orders can create price changes of this magnitude in an Inactive stock, which explains the importance of not having any"'Leakag regarding our portiolio holdings Late in the year we wore successful In finding » special situation where wa toutd become the largest bolders at an attractive price, so we sold Sar block of Commonwealth, obtaining $80 per share although the quote market was about 20% lower at the me. di te obvious that we could still be sitting with « $50 stock patiently buying in dribs and drabs, and I would be quite happy with such program although our performance relative to the market last year Prekg have looked poor. The year when a ettuation auch se Commonwe wegalte in @ realized profit fa, toa great oxtent, fortuitous, Thus, our eeccarmante (or snyslngie eas measaen ous mus uone eaketeeer for Petimadag long term reralte,, However, 1 belleve|that & program oF 08 Seating In such undervalued well protected securities offers the surest means of long term profits in securities, 1 might mention that the buyer well over the years, However, Intrinelc value of $135 la of the stock at $80 can expect to do quit the relative undervaluation at $60 with quite different from a price of $50 with an tetrinsle value of $125, and It seemed to me that our capital could bet be employed in the eituation which replaced it, Thle new situation 1 vomechal larger than Commonwealth and represents about 25% of the soe of the various partnersbips, While the degree of undervaluatio tuo greater than in many other securities we own( oF even less than some) we are the largest stockholder and this has substantial sdvante tnany times in determining the length of time required to correct the cadervaluation, In thie particular holding we are virtually assured of performance better than that of the Dow-Jones for the period we hold THE CURRENT SITUATION ‘The bigher the level of the market, the fewer the undervalued secur! and Lam finding some difficulty In securing av adequate number of attractive Investments, I would prefer to increase the percentage of